What's next for Hudson's Bay?
The 350-year-old company has been here before: Possessing vast real estate holdings with more value than its once-lucrative core business. Will this retail empire go the way of the fur trade?
Hudson's Bay Co., whose origins harken back to the Canadian fur trade that helped the English and French conquer what is now North America, shook the retail world on Monday when CEO Jerry Storch unexpectedly stepped down.
That was widely seen as a defensive move after months-long agitation from activist investor Land & Buildings Investment Management, which has pressed Hudson’s Bay to sell off its best properties and deliver the proceeds to investors, perhaps through a go-private buyout. In a statement Monday, the hedge fund described it as a "consolidation of power" on the part of Hudson's Bay governor and executive chairman Richard Baker, an attempt by the board "to buy time and placate investors to address under performance and undervaluation." Land & Buildings expressed zero confidence in the board and said it plans on calling a special meeting of investors to remove directors, among other proposals, according to the statement.
It's a remarkable imbroglio for a company that in the early months of the year seemed poised to gobble up Macy's — America's largest department store — and later, upscale department store Neiman Marcus, which also owns Bergdorf Goodman.
"This isn’t a retail company — it's a real estate company. There’s no happiness today at HBC — there’s nothing normal about somebody leaving at this time of year."
Director of Retail Studies, Columbia University Graduate School of Business
"They’ve gone from being the hunter a year ago, looking to acquire Macy's or Neiman Marcus, to being the hunted," Mark Cohen, director of retail studies at Columbia University's Graduate School of Business, told Retail Dive. "This isn’t a retail company — it's a real estate company. There’s no happiness today at HBC — there’s nothing normal about somebody leaving at this time of year."
Retail vs real estate
Hudson's Bay's adversary in this saga could not be more aptly named. Land & Buildings' founder and Chief Information Officer Jonathan Litt, in a June letter, urged the company to "aggressively" monetize its real estate portfolio, in particular its "crown jewels," which include its Saks Fifth Avenue property in Manhattan.
It's difficult to argue with this reasoning, considering the contention that the Saks property alone, which the company, led by Baker, acquired for $2.4 billion in cash four years ago, is worth $15 per share, topping Hudson's Bay's stock price.
"They’ve got a big challenge — and I don’t know what they’re going to do — their stores aren’t working. But on the real estate side they’ve done absolutely brilliantly," Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive, noting that the company also made a fortune selling its Canadian discount Zellers stores to Target at a premium six years ago. "Just walk through Saks, first of all there are no people. They’ve done so many cost cuts, there's hardly anybody there. You go to Nordstrom, they know exactly how to approach you, same with Neiman's. Service matters to the customer. And it's a way to fight Amazon — personal service."
Baker hails from a real estate family, and his entry into the department store space sprang from the opportunity in 2006 to buy Lord & Taylor, which his real estate investment firm, National Realty & Development Corp., snapped up for the relative bargain of $1.2 billion. Two years later he bought Hudson's Bay for an undisclosed amount but as the Great Recession took hold, he said it wasn't valued much above the $1.1 billion its previous owner had paid. Since then, the Baker-led Hudson's Bay has been on a tear, gobbling up Saks in 2013 and, two years after that, Germany’s largest department store chain, Kaufhof, for €2.82 billion (euros) or $3.2 billion. That transaction also included Belgian department store chain Galeria Inno.
"It all really makes one question HBC’s underlying motivation. Is this a retailer who happens to own some great real estate or a real estate company where retail simply pays a portion of the holding costs? I’ve been inclined toward believing the latter for years now."
All those stores, now on two continents, have been in need of reinvention, but retail has decidedly taken a back seat, experts told Retail Dive.
"It all really makes one question HBC’s underlying motivation," Doug Stephens, retail futurist and author of "Reengineering Retail: The Future of Selling in a Post-Digital World," told Retail Dive in an email. "Is this a retailer who happens to own some great real estate or a real estate company where retail simply pays a portion of the holding costs? I’ve been inclined toward believing the latter for years now."
Storch's departure likely reveals a fundamental disconnect between Baker's real estate inclinations and Storch's retail focus, according to Neil Saunders, GlobalData Retail Managing Director. "It is likely that Storch wanted to pursue a fairly purist retail strategy which involved turning around trading by driving investments in areas like digital, brands and the proposition," he told Retail Dive in email. "However, it seems that the company is being dragged into a real estate play to monetize property assets. This is something supported by a number of activist investors and it is at odds with a more focused retail strategy."
Jerry Storch was dealt a very difficult hand, according to Stephens. "It’s no secret that the department store channel has a fundamental relevance issue, but I think in HBC’s case the problems have been compounded by a failure to genuinely address changing consumer needs," he said. "HBC leadership, prior to Storch, talked a good game and said all the right buzzwords but little actually happened in the way of meaningful or positive change in the retail experience."
It doesn't help that Storch himself, though he has extensive retail experience, isn't well versed in apparel merchandising, which has become any department store's essential raison d'être. "He was never an apparel merchant in his life, when he was at Target he was working strategically with foods," Davidowitz said. "Then he went to Toys R Us, where he failed. It would appear to me that you would want to get somebody steeped in apparel retailing."
That Storch has left likely means that, in HBC's tug of war of real estate vs retail, real estate has won. "Storch’s background is a merchant. He has a good pedigree in retail and would have taken the position on the assumption that he would be able to run HBC as a retailer, not as a kind of property fund," Saunders said. "The sudden departure may well signal that the real estate option is imminent."
In fact, it's already happening. At press time, news broke that Lord & Taylor's 5th Avenue store will be sold to office-sharing company WeWork for $850 million.
What, and who, is next?
It's telling that Lord & Taylor's flagship Manhattan property is poised to be emptied of retail to become office space for today's freelance economy. But Hudson's Bay Co. remains a retail enterprise and not all of its department store space in North America and abroad can possibly be shifted to other uses.
Like its rivals in the space, the company is in a difficult position, according to Saunders. "It has a mix of brands, some of which need to be reset and reinvented in order to engage with shoppers. It also seems to be struggling to make its off-price business work, which is unfortunate given the good growth in that area. This suggests that buying decisions have been poor and that the merchandise mix is very off-pitch," he said.
That doesn't mean that its situation is that much more dire than any other retailer in the space, thanks in part to the leadership at its various banners. "Because individual brands and divisions have their own heads, HBC is not likely to go into a tailspin because of Storch’s departure," Saunders said. "However, longer term it will need another CEO as there are a lot of decisions to be made as it tries to carve out a future in a very tough part of the retail market."
Who that will be is the question of the moment. Names floated by our experts include Mickey Drexler, who began his retail career at Macy's, turned around Ann Taylor, revolutionized The Gap and made inroads at J. Crew before his departure last year. Or Michael Gould, who is credited with turning around Macy's-owned Bloomingdale's when he was CEO there. But those are men in their 70s, and Gould has lamented that the department store model is "broken," though he has also said he believes it can be fixed.
"That kind of background — a guy who has made department stores successful," Davidowitz said of Gould, though he, like others, was at a loss to suggest a viable candidate to lead Hudson's Bay. "That’s the kind of guy I’d want to hire."
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